Oil Shocks and External Balances

IMF Working Papers, May 1, 2007

Source details

Research question: Effects of demand and supply shocks in the global crude oil market on measures of countries' external balance during 1975-2004.
External balance measures examined: oil trade balance, non-oil trade balance, merchandise trade balance, the current account, and changes in net foreign assets (NFA).
Geographic/samples scope: U.S., the Euro area, Japan, oil exporters, and middle-income oil-importing economies.
Data source noted for NFA analysis: Lane-Milesi-Ferretti NFA data set.

The effect of oil shocks on the merchandise trade balance and the current account can be large, depending on the source of the shock.
The net effect on external balances depends critically on the response of the non-oil trade balance.
Effects differ systematically between the U.S. and other oil-importing countries.
Valuation effects: The authors document the presence of large and systematic (if not always statistically significant) valuation effects in response to oil shocks for:
- the U.S.,
- other oil-importing economies,
- oil exporters.
Financial integration interaction: Estimates suggest that increased international financial integration will tend to cushion the effect of oil shocks on NFA positions for major oil exporters and the U.S., but may amplify it for other oil importers.

Monitoring non-oil trade balance responses is critical to assessing the aggregate external balance impact of oil shocks.
Cross-country heterogeneity implies policy responses should account for differences between the U.S., other oil-importing countries, and oil exporters.
The role of international financial integration is two-sided:
- May cushion NFA volatility from oil shocks for major oil exporters and the U.S.
- May amplify NFA volatility from oil shocks for other oil importers.

International Monetary Fund. "Oil Shocks and External Balances", IMF Working Papers 2007, 110 (2007).